What Is the Section 180 Deduction for Farmers?
Section 180 offers a tax election for farmers to currently deduct soil and land conditioning expenses rather than capitalizing these costs over time.
Internal Revenue Code Section 180 provides a tax benefit for those in the farming business, allowing an election to currently deduct expenses for materials that enrich or condition farmland. Instead of capitalizing these costs by adding them to the land’s cost basis, a farmer can treat them as an immediate business expense. The deduction also extends to “residual soil fertility,” which applies when purchased farmland already contains nutrient levels from prior conditioning. The value of this excess fertility can sometimes be deducted by new landowners.
Taxpayer Eligibility Requirements
To qualify for the Section 180 deduction, a taxpayer must be engaged in the “business of farming.” The Internal Revenue Service defines this as cultivating, operating, or managing a farm for profit. This can include individuals, families, partnerships, and trusts that actively participate in farming.
For example, a farm owner-operator who manages crop production or a tenant farmer who leases land and is responsible for its cultivation both qualify. These taxpayers bear the risks and rewards of the farming operation, which distinguishes them from passive landowners.
A landowner who cash-rents their property to a farmer for a flat, fixed fee without any involvement in the farming activities is generally not considered to be in the business of farming. Their income is passive rental income, not farming income, and they do not meet the active engagement requirement.
Qualifying Soil and Land Conditioning Expenditures
The deduction under Section 180 is specific to the costs of materials used to enrich, neutralize, or condition land used in farming. Qualifying expenses include the purchase and application of fertilizer, lime, ground limestone, marl, and potash. This applies to land used to produce crops, fruits, or other agricultural products, as well as land used for the sustenance of livestock, such as pastures.
The provision also allows for a deduction related to the value of excess residual fertility in newly acquired land. This applies when purchased farmland contains nutrient levels above what is necessary for optimal crop yields, and this excess fertility is treated as a depreciable asset. To claim this, its value must be determined through professional soil testing and analysis.
This aspect of the deduction requires careful documentation. An agronomist’s report can substantiate the claim by providing a comprehensive soil analysis, an estimation of the fertility’s value, and a calculation of the residual amount.
How to Claim the Deduction
A taxpayer with qualifying expenditures has a choice: deduct the costs in the current tax year or capitalize them. Electing to deduct provides an immediate reduction in taxable income. Capitalizing, on the other hand, means adding the expense to the cost basis of the land, which is then recovered either when the land is sold or amortized over its useful life.
The election to deduct these expenses is made by claiming them on the appropriate tax form for the year the costs were paid or incurred. For most farmers, this means reporting the expenses on Schedule F (Form 1040), Profit or Loss From Farming, on the line designated for such costs.
No separate, formal election statement needs to be attached to the tax return, as the act of deducting the expense on Schedule F is considered the election under Section 180. This is an annual election, meaning a farmer can choose each year whether to deduct or capitalize that year’s qualifying expenditures.